Portfolio manager sees 'paradigm shift' for oilpatch crude tumbles

CP

CALGARY - Oilpatch companies will have to take another look at their 2015 budgets after being caught off guard by a steep and sudden drop in crude prices, portfolio managers said Friday as oil plunged to a five-year low.

John Stephenson, president and CEO of Stephenson & Company Capital Management, predicts firms will have to live with crude prices of US$65 per barrel — or even lower — for some time.

"This is a new environment. This is a paradigm shift," he said.

The price of U.S. benchmark crude has fallen by more than a third since the summer. It closed at US$66.15 a barrel on Friday — down about 10 per cent since Wednesday's close.

On Thursday, the Organization of Petroleum Exporting Countries said it would keep output at 30 million barrels a day rather than cut back and put a floor under prices, meaning there's not much to buoy crude in the near term.

"Saudi Arabia has decided to draw the line here and they've drawn the line on it because they don't want to lose relevance in the world," said Stephenson.

"They're worried that if they allow the American growth in shale oil to continue, they would have to keep cutting back their own production."

Canadian energy stocks have taken a haircut of about nine per cent over the past two days.

The shift in oil markets has "caught the oil industry by a bit of a surprise," said Stephenson, adding that oil companies will now be looking at their plans for next year with "new eyes."

CEOs and chief financial officers in the oilpatch have some tough decisions to make in the weeks ahead, said Laura Lau, senior vice-president at Brompton Group.

"If I was a Calgary CEO or CFO, I'd definitely have to rethink my budget, that's for sure," she said.

That even goes for companies that have locked in set prices through hedging contracts.

But there's not much companies with major oilsands projects underway — like the Suncor Energy-led, $13.5-billion Fort Hills mine — can do to respond to the price drop.

"They're like a freight train. It's hard to stop them. A lot of shale oil projects are easier to slow down or stop," said Lau.

Shortly before OPEC's decision to stand pat on production, the Alberta government had predicted prices would average US$75 a barrel for the remainder of the fiscal year. However, in a speech to a Calgary business audience on Friday, Alberta Premier Jim Prentice said it's looking more like between $65 and $75.

"This is a price trough, to be sure. It is a price trough of uncertain duration. But it is a price trough that has been brought on by a conscious decision by OPEC and its members to overproduce, to oppose market share discipline on themselves and arguably on other players in the marketplace," he told a Calgary business audience.

"To be sure, there will be consequences, but we will weather this."

On a more positive note, lower crude means consumers are benefiting at the gas pump.

Roger McKnight, with En-Pro International in Oshawa, Ont., said motorists across the country are enjoying lower prices, though differing tax structures and market dynamics mean some are paying much more than others.

The average price for a litre of gas in Edmonton now is at around 96 cents, according to Gasbuddy.com and some stations in Calgary were posting sub-dollar prices too.

"On Sunday you're probably going to see a drop of about three cents. That will put Ottawa, believe it or not, below a dollar," he said.

At the higher end, Montreal was seeing average gas prices of $1.24 per litre and Vancouver was at $1.21.

There are some offsets to lower crude, however. McKnight said foreign exchange swings are a headwind for Canadian consumers, as energy products tend to be bought and sold in U.S. dollars. On Friday, the loonie was fell almost a penny to 87.41 cents US.

And oil companies that have operations in both oilfields and refineries will be looking to bolster their profit margins.

"I just don't know how much longer the oil companies can handle that because I think the refining margins must be getting rather narrow," McKnight said.

"If they start hurting in the upstream with this crude oil price war going on, they're going to compensate for that by not passing on as much reductions on the downstream, so the consumer won't see as much happening that way."

McKnight said he can't see OPEC keeping up its levels indefinitely.

"I think OPEC is going to have an emergency meeting within three months because nine of the 12 members of OPEC need US$100 a barrel to balance their budgets and provide social services for their people. So I can't see this going on much longer."